Flash Mobs of Trading Robots Coalescing To Rule Markets

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Flash Mobs of Trading Robots Coalescing To Rule Markets

Posted by samzenpus on Thursday September 12, 2013 @12:08AM from the john-henry dept.

An anonymous reader writes "Financial markets experienced a series of computer glitches recently that brought operations to a halt. According to a researcher at the University of Miami, mobs of ultrafast robots, which trade and operate at speeds beyond human capability, may be responsible for these "flash freezes". From the article: '"Even though each trading algorithm/robot is out to gain a profit at the expense of any other, and hence act as a predator, any algorithm which is trading has a market impact and hence can become noticeable to other algorithms," said Neil Johnson, a professor of physics at the College of Arts and Sciences at the University of Miami (UM) and lead author of the new study. "So although they are all predators, some can then become the prey of other algorithms depending on the conditions. Just like animal predators can also fall prey to each other." When there's a normal combination of prey and predators, he says, everything is in balance. But once predators are introduced that are too fast, they create extreme events.'"

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Should be a tax on every transaction by Anonymous Coward · 2013-09-12 00:15 · Score: 4, Interesting

Every time I buy a stock or sell one, the IRS and other taxing authorities suck some money out of me.
When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.
There should be a tax maybe .001 cents per transaction. That would cut the amount of chatter and computer predation.
Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.
You do not get the best price, they get a profit. If they were taxed on both ends of that, they would not do it and you would get a better price.
1. Re:Should be a tax on every transaction by khallow · 2013-09-12 00:21 · Score: 3, Insightful
  
  Every time I buy a stock or sell one, the IRS and other taxing authorities suck some money out of me.
  
  When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.
  I'm pretty sure the IRS gets their cut too. But they get a cut of profits just like they do of your profits.
  
  There should be a tax maybe .001 cents per transaction.
  Why? No one has explained why anything needs to be done at all. It's all "rich people are making money therefore we need to screw it up for them".
  
  That would cut the amount of chatter and computer predation.
  And why is that considered a good thing? I think we need more chatter and computer predation.
  
  Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.
  No, they don't. They don't have ESP. They can't see what you do on a market before you actually do something on the market.
2. Re:Should be a tax on every transaction by Thanshin · 2013-09-12 00:21 · Score: 3, Interesting
  
  When these computers buy and sell shares several times a second, they do not get taxed. That is not fair.
  Laws aren't made to be fair.
  
  There should be a tax maybe .001 cents per transaction. That would cut the amount of chatter and computer predation.
  That would go against the people who make the laws.
  
  Some of these systems see what slow dim you are going to buy, jump ahead of you in line, buy it and then sell it to you.
  You do not get the best price, they get a profit. If they were taxed on both ends of that, they would not do it and you would get a better price.
  And that's the reason for such tax not to exist. Because you getting a better price is not the desired outcome.
3. Re:Should be a tax on every transaction by Anonymous Coward · 2013-09-12 00:26 · Score: 5, Insightful
  
  Why?
  Because we, the people, end up bailing out these irresponsible fuckers who have turned Wallstreet into a casino. The next bailout better be paid in advance by those who caused it, hence a tax on gambling with stocks.
4. Re:Should be a tax on every transaction by alexander_686 · 2013-09-12 00:28 · Score: 3, Informative
  
  No, they are taxed on their profit. They are even taxed on their potential profit. “Trading Positions” are taxed on their unrealized loss at the end of every year. So in fact they have to pay more profits.
  And there has been a lot of debate on the effect of a Tobin tax the actual effect has been less then advertised. When France introduced one last they got more volatility, lower liquidity, and higher spreads. The last 2 imply that the middle men (such as HFT) were making more money per trade and “stealing” more profits from small stock traders.
5. Re:Should be a tax on every transaction by Thanshin · 2013-09-12 00:33 · Score: 4, Insightful
  
  Because we, the people, end up bailing out these irresponsible fuckers who have turned Wallstreet into a casino.
  Did you decide to bail anyone?
  Did you have any choice in whether to bail them?
  Did you have any power at all?
  We, the people, didn't bail anything nor anyone. We were robbed of a fraction of our production by the powerful and THEY bailed the banks, because THEY are the ones with a lot of money inside those banks.
  
  The next bailout better be paid in advance by those who caused it, hence a tax on gambling with stocks.
  The next bailout will be paid by the government. And the people have no money, nor voice, nor power to stop that.
6. Re:Should be a tax on every transaction by fuzzyfuzzyfungus · 2013-09-12 00:38 · Score: 5, Insightful
  
  Please, don't disparage the good folks in the probabilistic entertainment area of the hospitality sector by such comparisons.
  
  Casinos may be tacky; and they do suck some gambling addicts dry; but their danger to the larger economy, and to parties who don't choose to deal with them, is quite minimal. Even better, because of their tackiness and the widespread knowledge of how foolish it is to work with them when greater-than-recreational amounts of money are on the line, nobody proposes massive bailouts, or handing social security over to them to manage!
7. Re:Should be a tax on every transaction by khallow · 2013-09-12 00:42 · Score: 4, Funny
  
  They don't have ESP, but they can see buy orders before they are executed.
  Then that's insider trading. The US has laws on the books for that.
8. Re: Should be a tax on every transaction by tolkienfan · 2013-09-12 00:46 · Score: 4, Informative
  
  I know of no pure HFT company that was bailed out. Some banks have HFT divisions, but that's incidental to their problems and eventual bailout.
9. Re:Should be a tax on every transaction by smallfries · 2013-09-12 00:50 · Score: 2
  
  No, they don't. They don't have ESP. They can't see what you do on a market before you actually do something on the market.
  That's a bit of a silly thing to say, unless you actually believe that ESP would be necessary to see what is about to happen in a market. I don't know if you've given any real thought to this at all: but before a buyer and a seller can meet to make a trade they both need to signal that they have the intention to do so.
  
  --
  Slashdot: where don knuth is an idiot because he cant grasp the awesome power of php
10. Re:Should be a tax on every transaction by Xest · 2013-09-12 01:00 · Score: 2, Informative
  
  "Why? No one has explained why anything needs to be done at all. It's all "rich people are making money therefore we need to screw it up for them"."
  So your view is that people should be able to make money no matter what the cost and that making money is the single key thing that should come above all else?
  How far are you willing to back that argument? At one extreme, if a military commander manages to pull of a bloody coup in the US and seizes the money of all the bankers and uses his new found power to retroactively making everything he did legal then is that okay?
  Where exactly do you draw the line as to what is and isn't okay in terms of the ability to make money regardless of the side effects or do you feel there are no limits and the ability to make money is the single most important pinnacle of human achievement and attainment?
  The problem with your argument is that most people would argue the line is drawn at the point where such money making schemes cause a crash and require a tax payer bailout because at that point it's no longer simply a case of free market economics and survival of the fittest, it's an artificially supported industry and free market libertarianism has already long gone out the window. Had things been left to free market economics the companies doing the current trading would've had to declare bankruptcy and would not now even exist.
  HFT has a real impact on world economies and often unpredictably so. The more enlightened argument is that it's probably not smart to create such unpredictable chaotic systems and give them a direct feed into national and global economies where consequences range from some average Joe losing his job and house, all the way through to wider economic strife creating heightened conditions for things like riots and war where real actual lives are lost.
  To turn the argument around, why do you think this sort of system should've been allowed in the first place? What do you consider to be the benefits?
  "And why is that considered a good thing? I think we need more chatter and computer predation."
  What makes you say this? Is there some evidence that this would increase market stability or something or were you just disagreeing with the GP for the classic online purpose of protecting your digital manhood by refusing to cede a single point without any consideration as to whether your disagreement has any merit, or in fact any meaning? I think you need to expand on this point and explain why you think increase chatter and predation is a good thing rather than just say you support it with no explanation.
  "They can't see what you do on a market before you actually do something on the market."
  That's the whole point of predictive algorithms used in the financial sector, they're designed to do exactly that - predict with a high degree of accuracy what manual traders are going to do based on nanosecond by nanosecond evaluation of the market and trends (something no human can do that fast), and then beat them to the punch.
11. Re:Should be a tax on every transaction by bmxeroh · 2013-09-12 01:12 · Score: 3, Interesting
  
  No, what the poster above is referring to is a form of arbitrage. Admittedly, it doesn't sound like the average person is affected by this so much as large block orders placed by big companies, but it absolutely happens. The issue is that these very large orders take a significant amount of time to complete, and the HFT algos have plenty of time to see what is happening, buy up a position and sell it as the price is going up due to the large purchase. It's not about large profits, remember this is High Frequency Trading, so all they have to do is take advantage of very small price differences a gazillion times a day to turn a hefty profit.
  
  --
  Central Ohio Home Theater Installation - The Theater People
12. Re:Should be a tax on every transaction by Anonymous Coward · 2013-09-12 01:14 · Score: 5, Interesting
  
  No, they don't. They don't have ESP. They can't see what you do on a market before you actually do something on the market.
  Actually they do have esp.
  They can see what order you have placed before it is fulfilled.
  Have you not heard of level 2 market data.
  Pay for it and you can see what orders are placed - volume, bid/ask price, trading organisation.
  Combine that with super high speed connections to the exchange and you can see transactions at the millisecond and act on them.
  Off topic:
  If you've ever traded you may have spotted the effects of high frequency when using candlestick charts at the 1 minute timeframe.
  You will see long repeated sequences of Bull Candle, Bear Candle of the same size over a short time scale (seconds)
  Thats proof of Banks and institutional traders bots / algorithms fighting for price power.
  8 Years ago you would be lucky to have spotted a dozen a year.
  Nowadays there's one everyday if you know which instrument to look at.
13. Re: Should be a tax on every transaction by bmxeroh · 2013-09-12 01:26 · Score: 2
  
  I'm going to play devils advocate here for a minute. You are right that everyone can see the buy and sell orders. The key is that in extremely high frequency trading, they can REACT to these buy and sell orders faster than anyone else. So I can see it being somewhat possible. Consider the following scenario. There are 10 sell orders for $10 dollars, and 10 buy orders for market price. It takes a minute for a buyer to be matched up with a seller organically, and in the meantime the HFT algos buy up all of the $10 sell positions and immediately put new sell orders out for $10.50. Now the original buyer purchases those stocks for $10.50 rather than $10, the original sellers got what they wanted, the HFT guys made money, and the person that wasn't smart enough to set a limit order got screwed 50 cents a share and doesn't know the difference.
  
  Admittedly, I'm talking out of my ass hence the devils advocate qualifier, but these are very, very large markets with lots of players and lots of middle-men so I could see plenty of room for this to happen on this level. I already made note of this happening (and is known to happen for real) on very large orders being placed by investment firms, so I don't see why it couldn't happen with smaller orders if they are fast enough. In reality, it's just simply arbitrage.
  
  --
  Central Ohio Home Theater Installation - The Theater People
14. Re:Should be a tax on every transaction by khallow · 2013-09-12 01:36 · Score: 3, Insightful
  
  As long as there's risk, it's not arbitrage. A small risk over thousands or more orders can become a big risk. And the AC didn't say "big orders". And even a human market maker can move fast enough to exploit big order trading. That was as I see it one of the big reasons why some people could make money at day trading, for example.
15. Re:Should be a tax on every transaction by lxs · 2013-09-12 01:47 · Score: 5, Funny
  
  Being European, I prefer 1789. Off with their heads!
16. Re: Should be a tax on every transaction by Anonymous Coward · 2013-09-12 02:30 · Score: 2, Informative
  
  Saly, you're wrong. They can. Say you have a bid at $10.00 and the spread is $0.01. You're on top of the order book right? Nobody can step in front unless they actually buy the ask lot, 'cause the pricing granularity is $0.01. Bzzzzzzt! Wrong. HFT shops have (among others) an exception and can bid in increments of 0$.0001 to *ahem* provide liquidity. So an algo can (and likely will, if needed) step in front of you at $10.0001. Suddenly, gaming the system just got a fraction of a cent easier.
17. Re:Should be a tax on every transaction by ultranova · 2013-09-12 02:56 · Score: 2, Insightful
  
  Why? No one has explained why anything needs to be done at all. It's all "rich people are making money therefore we need to screw it up for them".
  
  Money is a form of power. Letting the rich get richer without limit lets them concentrate power in their hands without limit. This, in turn, leads to a dictatorship: it's not exactly a secret that the Government does whatever it's corporate masters tell it to.
  Besides, stock market is a zero-sum game. It generates no value, therefore every single cent a HFT makes comes out of someone else's pocket. So if the rich get richer the poor get poorer and suffer needless economic hardship, all just a few people can live in a lap of luxury.
  It's about time to acknowledge that the 1% are waging a class war against the rest of humanity and start fighting back. Or at least I will; you, of course, are free to lick the boot that stomps on your face, if it makes you feel you're vicariously succesful.
  
  --
  Forget magic. Any technology distinguishable from divine power is insufficiently advanced.
18. Re:Should be a tax on every transaction by ultranova · 2013-09-12 03:08 · Score: 2
  
  Then that's insider trading. The US has laws on the books for that.
  
  I love how this got modded +4 Funny.
  
  --
  Forget magic. Any technology distinguishable from divine power is insufficiently advanced.
19. Re:Should be a tax on every transaction by Araes · 2013-09-12 03:12 · Score: 2
  
  Yes they can, and yes they do. Front running (or things that look suspiciously like it) happen constantly on the electronic exchanges. Flash trading is a form of trading in which certain market participants are allowed to see incoming orders to buy or sell securities very slightly earlier than the general market participants, typically 30 milliseconds, in exchange for a fee. This feature was introduced to allow participants like market makers the opportunity to meet or improve on the National best bid and offer price to ensure incoming orders were matched at the most advantageous prices according to Regulation NMS. What this then leads to is millisecond front running where the traders see your order, adjust theirs to take best advantage of it, and by the time yours goes in, a portion of the profit has been leeched out. The Securities and Exchange Commission proposed banning the practice as part of regulatory reforms in the wake of the Financial crisis of 2007–2010, but the proposals have not been implemented.
20. Re: Should be a tax on every transaction by Maxo-Texas · 2013-09-12 04:19 · Score: 2
  
  Hi Bmxeroh:
  It's real and here is just one of many links you can find on it when you google it.
  It is starting to be addressed (this is from May of 2012) but it's not fixed yet. It was still happening earlier this year.
  http://www.securitiestechnologymonitor.com/blogs/uptick-automated-front-running-exception-30852-1.html?sifma=tech
  Quote:
  One involves the original large block electronic trading outlet, Institutional Networks Corporation aka Instinet, and what happened when it opened up its order flow to automated traders.
  "The institutional clients complained immediately. If an institutional client places a bid to buy 5,000 shares at 24 1/8, the automated trading firms instantly placed a bid for a few hundred shares at 1/64 higher. They did this with every stock. If the institutional clients canceled their bids, the automated traders canceled their higher bids as well."
  That is found on Location 404 of 5286 on the Kindle edition of âoeBroken Markets,â(TM)â(TM)by Sal Arnuk and Joe Saluzzi. They are partners, co-founders and co-heads of equity trading of Themis Trading LLC, an agency broker that trades for institutional money managers and hedge funds.
  (deletia)
  Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers.
  Interestingly enough, the Securities and Exchange Commission on May 30 filed a notice that the broker overseer, the Financial Industry Regulatory Authority, wanted to amend its front-running rulebook, to cover front-running of block transactions.
  
  --
  She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
21. Re:Should be a tax on every transaction by Gilmoure · 2013-09-12 04:42 · Score: 2
  
  Pot in every chicken?
  
  --
  I drank what? -- Socrates
22. Re: Should be a tax on every transaction by Rockoon · 2013-09-12 07:22 · Score: 3, Insightful
  
  To be quite complete, all trades happen at an agreed upon price and if the HFT algorithm is involved its because its got the current highest bid or lowest ask out there.
  
  You will notice that nobody ever has anything to say about this fact being somehow bad. The arguments, 'cept for one, is indeed a combinations of "its evil algorithms" hand waving and "its evil rich people" hand waving.
  
  The one valid argument is that the markets sometimes halt trading and undo previous orders, and since HFT's hit the scene its always been because of HFT's. The solution isnt to stop HFT trading... its to stop these do-overs that prevent algorithmic traders from taking very large losses: Market regulation has distorted the true risks. Restore the true risks and let the bad HFT's fail big once in awhile.
  
  Simple.
  
  --
  "His name was James Damore."
So far removed from anything useful for society! by Rosco+P.+Coltrane · 2013-09-12 00:16 · Score: 5, Interesting

This sort of financial activities is complete economic nonsense, as it brings nothing of value to people, companies or other concerns that actually produce something useful to society as a whole. Just reading the /. blurb should be enough to convince anyone that "robot trading" is a parasitic activity that should be taxed to oblivion - by ways of a tax based on the speed of trading for instance - and financial markets forced to become what they're supposed to be: places for investors to invest in real economic activities for the long haul.

--
"A door is what a dog is perpetually on the wrong side of" - Ogden Nash
sounds like by Connie_Lingus · 2013-09-12 00:21 · Score: 2

core wars 2013

--
never bring a twinkie to a food fight.
Re:So far removed from anything useful for society by Rosco+P.+Coltrane · 2013-09-12 00:28 · Score: 2

Yes, but allowing it and taxing the hell out of it would bring some of that money back into the government's pocket - or see it another way, the financial sumbitches that are bleeding most countries' economies white without any remorse today would have to start paying back some.
If a tax is levied on the speed of trading, at some point an equilibrium would be reached at which traders would consider the level of taxation acceptable: they wouldn't stop speed-trading, just doing it at a speed/cost that they're willing to bear. Better to collect money that way than to ban the activity altogether and collect no money at all.

--
"A door is what a dog is perpetually on the wrong side of" - Ogden Nash
Re:So they get to play computer games by Thanshin · 2013-09-12 00:29 · Score: 3, Insightful

So they get to play computer games, where the victims are ordinary people's savings, pensions, etc.
Only if those people give them their savings to play with.
This cannot end well by Anna+Merikin · 2013-09-12 00:32 · Score: 2

Ultrafast bots trading on minuscule changes by algorithm within a market sensitive to policy adjustments real or suspected by the Federal Reserve Bank, which admits it acts slowly, deliberately and without transparency or effective oversight, cannot end well.
With apologies to J. Swift... by fuzzyfuzzyfungus · 2013-09-12 00:39 · Score: 3, Insightful

The vermin only teaze and pinch
Their foes superior by an inch.
So, naturalists observe, a flea
Has smaller fleas that on him prey;
And these have smaller still to bite 'em,
And so proceed ad infinitum.
Predatory investing? by Culture20 · 2013-09-12 00:40 · Score: 4, Interesting

Investment is a collaborative strategy, a symbiosis. Programming "investment bots" to be predatory is not a good thing. It introduces parasites into the mix.
Re:So far removed from anything useful for society by drinkypoo · 2013-09-12 00:42 · Score: 2, Interesting

Sure, there is. Higher liquidity and better market responsiveness to new knowledge.
Higher liquidity is primarily a benefit to corporations, which are a legal fiction which has no reason to exist if it does not benefit the public.

The case for banning fast trading doesn't exist.
I just made it.

Most such reasons turn out either unrelated to fast trading
Straw man. We are currently specifically having a conversation in the context of discussing a problem which is caused by fast trading.

or attributing mystical powers to fast trading
Straw man. You're talking about some nutter, which has nothing to do with me.
If the best you can do is engage in logical fallacy, you clearly have nothing of value to say. Please move along.

--
"You're right," Fisheye says. "I should have set it on 'whip' or 'chop.'"
If by JustOK · 2013-09-12 00:42 · Score: 2, Insightful

If the stock market made sense, it wouldn't work.

--
rewriting history since 2109
Ho Hum - the exchanges are the biggest crooks by FriendlyLurker · 2013-09-12 00:51 · Score: 5, Interesting

The flesh-and-blood sharks were thrown in jail (overnight, litrally) convicted of fraud many years later and given a tiny slap on the wrist compared to their actual crimes. This not done in the name of justice, but part of a larger power struggle to take the NYSE electronic (the families that had operated the NYSE for 200 years were blocking the move, shit started to hit the fan around 2003). The exchange specialist were only accused of skimming off the top for a short period of time, but everyone familiar with this practice knows that it goes back to 1970's and most likely well before that (Richard Ney called them out for skimming off the top in his best selling book The Wall Street Jungle around 1970), Richard Wyckoff talked about the principles & techniques of stock market manipulation (by the exchanges) it as far back as early 1900's). Since 1970 that are billions of dollars skimmed off the top - no investigation until a power struggle. The practice goes on today and it is the electronic exchanges that benefit instead of the NYSE specialists. Any talented stock market data analyst can confirm this by taking NYSE data pre electronic exchange data and comparing their "skimming" techniques as confirmed in the court case against the electronic data. Wyckoff became very wealthy living off the crumbs of the exchanges ill-gotten gains.
All this news is underlining is that the exchanges are having more of their crumbs stolen by independent parties... if you want reform, start with brining transparent to the stock marker exchanges and their skimming off the top practices. The cost to society is enormous.
Robots? by Anonymous Coward · 2013-09-12 01:23 · Score: 3, Funny

Robots? Really??
So Robots physically stormed into the NY Stock Exchange and took over trading?
Please, for the love of Terminator, please stopping calling programs "Robots"... "bots" are bad enough but can be overlooked but do not call them "Robots".
Hopelessly Naive by GlobalEcho · 2013-09-12 01:29 · Score: 5, Insightful

Consider the following quote from the paper

Since both crashes and spikes are typically more than 30 standard deviations larger than the average price movement either side of an event (see Figs. 1A and 1B), they are unlikely to have arisen by chance
This statement implies that the authors believe a gaussian model "should" apply to the market dynamics. As Benoit Mandelbrot and many others before and after him point out, financial markets never have followed gaussian dynamics and they probably never will. It's especially silly because they go on to analyze the distribution of Ultrafast Extreme Event (UEE) sizes as a power law.
Today's market has both accumulation algorithms now used by mutual funds and other sophisticated "buy and hold" investors, and market-making algorithms used by HF firms, and I fully believe there is some interesting dynamics arising from all that. Whether it is any weirder than the slower, human-derived, dynamics of yesteryear is still in doubt. Humans are so much more complex than any of those algorithms that I suspect if you examined the market behavior in 1980, and sped it up, you would see plots wilder than anything Nanex produces.
The paper is somewhat interesting, but not very convincing.
Re:So, we've gone from ... by DragonTHC · 2013-09-12 01:31 · Score: 2

I think the term they're looking for is botnet.
It may be legal software on machines they own, but it's still a botnet.

--
They're using their grammar skills there.
Re:So, we've gone from ... by Russ1642 · 2013-09-12 01:42 · Score: 3, Informative

Botnets are a coordinated networks of computers under a single malicious control. However, these trading 'robots' are individual computers under malicious control. They may seem like they coordinate with one another but they operate completely independently, reacting to the market not to some master controller.